20VC USV's Andy Weissman on The Future of The VC Industry, Why USV Does Not Vote On Investment Decisions & Why VCs Should Be Invisible

In this episode of "20 minutes VC," host Harry Stebbings interviews Andy Weissman, a partner at Union Square Ventures (USV), a firm with notable investments in Twitter, Twilio, and Tumblr. Andy shares his journey from co-founding Betaworks to joining USV and emphasizes the importance of process over luck in venture capital. He discusses the collaborative decision-making at USV, the nuances of reserve allocation, and the potential impact of ICOs on traditional VC models. The conversation also touches on the human elements of VC, such as mentorship and board dynamics, and concludes with Andy's recent investment in Flip, a sublet marketplace, reflecting USV's commitment to increasing economic freedom.

• Andy Weissman is a partner at Union Square Ventures (USV), a leading VC firm.
• USV has investments in notable companies like Twitter, Twilio, Zynga, Soundcloud, and Tumblr.
• Andy Weissman sits on the boards of YouNow, Science Exchange, Figure One, and CircleUp.
• Prior to USV, Andy co-founded Betaworks with John Borswig.
• The host, Harry Stebbings, expresses enthusiasm for having Andy on the show after persistent efforts.

"Now Andy is a partner at Union Square Ventures, one of the world's leading VC firms, with investments in Twitter, Twilio, Zynga, Soundcloud, Tumblr lending Club and many more incredible companies."

This quote introduces Andy Weissman's role at Union Square Ventures and highlights the firm's successful investment portfolio, establishing the context for his expertise in venture capital.

• Andy Weissman stumbled into the technology industry and then into venture capital.
• His company, Betaworks, was rejected by USV for investment but maintained a relationship with the firm.
• Andy's journey to becoming a partner at USV was unconventional, as he joined the firm after they initially rejected investing in his company.

"And then I eventually ended up here. And so the little joke story I like to tell is I couldn't get this firm to invest in my company, but I could get them to have me be a partner here."

The quote illustrates Andy's non-linear path to venture capital and his eventual partnership at USV, despite his company not receiving investment from the firm initially.

• Andy Weissman believes venture capital is about taking risks with uncertain, illiquid assets.
• The decision-making process in venture capital is critical and involves a degree of luck.
• Weissman suggests that skill is needed to be lucky, but the process is what accounts for randomness and uncertainty in investments.

"And if you have a process and you perfect that process and you stick with that process, sometimes it works and that's luck, right?"

The quote emphasizes the importance of a robust process in venture capital, acknowledging that even with such a process, successful outcomes can often be attributed to luck.

• Andy Weissman discusses the importance of having and perfecting a process in venture capital.
• Different processes work for different people or groups.
• At Betaworks, their process was influenced by a theory about social networking and social media.
• USV's process includes both an investment thesis and structural components such as fund size and reserve strategy.

"But I think what's important is at least acknowledging that process and trying to understand that process and trying to perfect that process and have conviction around that process, if that makes sense."

This quote highlights the necessity of recognizing, understanding, and refining the process of making investment decisions in venture capital.

• Andy Weissman's appreciation for the importance of process in venture capital has grown over time.
• He quotes John Kenneth Galbraith on the uncertainty of forecasting, relating it to venture capital.
• Weissman has become more comfortable with uncertainty and the importance of process rather than predicting the future.

"I'm really comfortable not knowing what I don't know. And in this world of uncertainty, or in this business of uncertainty. So therefore, I've gotten more comfortable with process being something that maybe over time I can prove I'm good at versus predicting the future, or even picking individual companies, though that's part of the job."

The quote conveys Andy's acceptance of uncertainty in venture capital and his belief in the value of process over prediction.

• Andy Weissman addresses the distinction between individual and firm processes in venture capital.
• At USV, the process is collaborative and consensus-driven, which may differ from firms that rely more on individual decision-making.

"This is such a good question. I think that different firms have different styles, right?"

This quote introduces the topic of how venture capital firms may differ in their approach to decision-making, with some emphasizing individual judgment and others, like USV, favoring a collective process.## Collaborative Decision-Making

• The firm operates through a collaborative process, sharing the outcomes of decisions among the group.
• Collaborative decision-making is seen as intrinsic to the firm's investment thesis.
• Individual processes at other firms contrast with the speaker's firm's group-oriented approach.

"And so we make decisions collaboratively as a group. And therefore we all share in the upside of those decisions, or the heartache or downside that comes from those decisions."

This quote emphasizes the collective nature of decision-making at the firm and how all members share the outcomes, whether positive or negative.

• There's a trend towards more collaborative, consensus, and process-driven funds, especially in specialized funds.
• Generalist funds tend to rely more on individualistic processes.

"I think with the rise of specialization within funds, we're seeing more collaborative, consensus, process driven funds."

The speaker notes a shift towards collaborative processes in specialized investment funds, as opposed to the individualistic approach in generalist funds.

• Acknowledging mistakes is part of the learning process in venture capital.
• The speaker reflects on a missed deal and the realization that not every decision has to be correct, as long as the process leads to several successful outcomes per fund.

"Not every decision doesn't have to be correct, but the process will lead to it being correct, hopefully a couple of times over the course of a fund."

This quote captures the idea that the overall investment process, rather than individual decisions, is what drives success in the venture capital business.

• Price sensitivity can be a mental trap in venture capital, but it's also a part of the mathematical craft of the business.
• The balance between avoiding the mental trap of valuation and adhering to the mathematical aspects is crucial.

"I do think part of the craft of VC is math, right? And that math is we have to take a fund and return it, let's say return three to four times the capital to our investors."

The quote discusses the importance of mathematical considerations in venture capital, highlighting the need to balance valuation concerns with the objective of returning multiple times the capital to investors.

• The firm does not vote on investment decisions but rather engages in thorough discussions until a consensus is reached.
• Investment decisions are based on various parameters, including alignment with the firm's investment thesis and practical considerations such as time commitment and ownership targets.

"We do not vote. We have a conversation. And that conversation leads to a point where everyone is comfortable with the parameters of an investment."

This quote describes the firm's method of reaching investment decisions through consensus-building conversations rather than formal voting.

• Reserve allocation involves maintaining significant ownership in promising companies over time.
• The firm's investment decisions are driven by a long-term view of a company's transformational potential, leading to continued support and investment.

"So we're long term very engaged partners. So that means we reserve full amounts for our companies and we generally keep investing in them."

The speaker explains the firm's approach to reserve allocation, emphasizing their commitment to long-term partnerships and continued investment in their portfolio companies.

• The speaker expresses interest in the practice of recycling cash in funds and maintaining limited partner (LP) satisfaction.
• The concept of recycling cash is seen as a nuanced aspect of fund management that can impact LP happiness.

"I'm really intrigued to hear how you think about recycling cash in the fund at USV, and how you look to maintain lp happiness in doing so."

This quote shows the speaker's curiosity about how funds manage early liquidity events and the strategies they use to keep their limited partners content with the fund's performance.## Recycling in Venture Capital

• Recycling refers to the reinvestment of gains back into the fund, which benefits both LPs (Limited Partners) and GPs (General Partners).
• It lowers the average amount of management fees for LPs and improves returns and carry for GPs.
• Reserves analysis and Monte Carlo simulations are conducted regularly to determine when to recycle money.
• The practice of recycling can happen early in the life of a portfolio, enhancing the fund's efficiency.

"Everyone wins with recycling. It's so good for your lps, it's additional investment dollars that they're not paying management fees on."

This quote emphasizes the benefits of recycling for LPs, as it allows them to invest more money without incurring additional management fees.

"We do reserves analysis continually a couple times a year on each one of our portfolios, we run Monte Carlo simulations and we look at where the average of all those potential outcomes are."

The quote explains the process of reserves analysis and the use of Monte Carlo simulations to inform decisions about when to recycle capital within a fund.

• The specific balance or limit to recycling is not set as a number but is likely around 120%.
• Documents may have limits on recycling, but recent funds have consistently recycled in the early stages.
• The practice of setting a specific target for recycling is not universally applied.

"I don't think we've ever set it as a number. I think it probably comes to 120, but I don't know if we've ever done the math on that."

Andy Weissman suggests that while there isn't a strict numerical target for recycling, the practice tends to reach around 120% by default.

• The current model of venture capital is highly effective for early-stage software technology investments.
• There's a question of whether the VC model is suitable for other sectors like consumer products, scientific endeavors, and blockchain technologies.
• ICOs (Initial Coin Offerings) provide an external stimulus for change in financing structures, which could lead to new models for different sectors.
• The structure of VC firms has remained conservative and unchanged for decades, prompting introspection about future changes.

"I believe on one point that early stage software technology based venture capital is a near perfect craft for what it does."

Andy Weissman states the effectiveness of the current VC model for early-stage software technology ventures, suggesting it's a highly specialized and successful approach.

"But maybe there can be better or different models for different categories, categories of businesses, asset classes, ways to structure things."

This quote reflects Andy Weissman's openness to the idea that the VC model may evolve to accommodate different types of businesses and asset classes.

• ICOs have introduced rapid and large-scale funding mechanisms that are global and code-based.
• The alignment of incentives through token systems in ICOs is promising, but the role of traditional VCs in this new landscape is uncertain.
• There is skepticism about the sustainability and disruption potential of ICOs.

"You have funding mechanisms that are happening incredibly fast at incredible magnitudes, and they're happening incredibly fast, incredible magnitudes, because they're programmatic, they're code based, and they're worldwide."

Andy Weissman describes the unprecedented speed and scale of funding through ICOs, highlighting their unique, code-based, global nature.

• There is no single archetype for an ideal venture investor; it varies based on individual strengths such as fundraising or strategic business management.
• The human element, such as personal connections and experience, is crucial in venture investing.
• There's speculation about the potential for purely quantitative investing in early-stage technology ventures.
• USV (Union Square Ventures) is exploring investments that believe in a quantitative, algorithmic approach.

"What do you think the most value add thing currently, today a venture investor does? Could we boil it down to one thing, or is that too simplistic?"

Harry Stebbings questions the possibility of identifying a single most valuable contribution of a venture investor, acknowledging the complexity of the role.

"We have made investments in other sectors where we believe the answer to that question may be yes."

Andy Weissman indicates that USV is investing in sectors where a quantitative approach to investing may be viable, reflecting a willingness to innovate beyond traditional VC methods.

• USV's investment thesis aligns with the idea of network effects and community-based businesses.
• Investments like Numerai represent the intersection of USV's thesis with quantitative, community-driven models.
• The thesis reflects a belief in network effects and the potential of community-driven business models to succeed in various sectors.

"We're investors in an entity called Numerai, which is a hedge fund that uses a community of data scientists and has some intricacies around that to make its trades."

This quote by Andy Weissman illustrates USV's investment in Numerai, highlighting the alignment with their thesis on network effects and community-based businesses.## VC Superpower

• Andy Weissman discusses his VC superpower as a combination of acknowledging what he doesn't know and being comfortable with uncertainty.
• He emphasizes the importance of decision-making in the face of uncertainty, which is a skill honed through experience.
• Andy believes that VCs should ideally be invisible, supporting the entrepreneurs they back rather than being in the spotlight.

"I believe that. I don't know what I don't know and I'm very, very comfortable with that."

This quote highlights Andy's acceptance of his limitations and his comfort with not having all the answers, which he considers a strength in venture capital.

"I believe actually VCs should be invisible."

Here, Andy expresses his old-fashioned belief that venture capitalists should not seek the limelight but rather support their entrepreneurs from behind the scenes.

• Andy acknowledges the value VC branding can provide to startups, such as giving them social validity and trust from larger corporations.
• He mentions that Union Square Ventures (USV) is transparent about their investments and uses public blog posts as investment memos.

"Having USV in your enterprise startup allows big corporates to feel comfortable that there's a sustainable cash Runway in this company and they can trust them as a vendor and a service provider."

Harry Stebbings presents an argument for the importance of VC branding, suggesting that it can provide startups with credibility and trustworthiness in the eyes of potential clients and partners.

"Our investment memos are our blog posts."

Andy explains how USV uses transparency in their investment process to provide social validity to their startups while still maintaining a sense of invisibility as a VC firm.

• Andy reflects on his personal growth as a board member, specifically in managing conflicts among board members or founders.
• He believes that dealing with conflicts effectively requires experience, and he feels he is improving in this aspect.

"I think that managing conflicts amongst board members or amongst founders is a thing that just takes more experience."

This quote highlights Andy's view that experience is key to becoming more adept at handling conflicts within a board or between founders.

• Andy shares that his biggest mentors are unaware that they are his mentors, implying a more informal and observational learning relationship.
• He values the insights and influence he gains from these individuals, though the mentorship is not explicitly defined.

"My biggest mentors don't know they're my mentors, so I can't out them."

Andy's statement underscores his belief in the power of indirect mentorship and the impact that others can have on one's growth without formal recognition.

• Andy expresses two personal beliefs that may not be widely shared: the idea that the only truth is music and the importance of taking care of one's shoes.
• He emphasizes quality footwear as a practical necessity for comfort and mobility.

"One is that the only truth is music. Everything else is uncertainty."

Andy conveys his belief in the universal and certain nature of music amidst a world of uncertainties.

"Whatever you do, take care of your shoes."

This quote reflects Andy's practical advice on the importance of quality footwear, which he considers more important than many other things.

• Andy's favorite book is "On the Road" by Jack Kerouac, which he values for its representation of life, love of ideas, and the transition from adolescence to adulthood.
• He appreciates the book's timelessness and its exploration of human experiences.

"My favorite book is on the road by Jack Kerouac. It is the book that I have read the most times because it's the book that represents the most about life..."

Andy explains why "On the Road" resonates with him, citing its thematic richness and relevance to various aspects of life and personal growth.

• Andy lists his favorite blogs and newsletters, which include Phish.net for music, Radio Free Mobile for technology analysis, and Albert Wenger's blog for its philosophical insights.
• He appreciates these sources for their content on his areas of interest and their unique styles.

"I have three favorites, which are three things I'm interested. One is fish net... The second one is radio free mobile... But Albert's blog to me is one of my favorites..."

Andy shares his top picks for blogs and newsletters, highlighting his diverse interests and the value he finds in each of these sources.

• Andy discusses USV's recent investment in Flip, a marketplace for sublet apartments.
• He explains that the investment was driven by the company's vision to increase economic freedom for individuals by providing more living options.

"The most recent publicly announced investment was a company called Flip... The reason we said yes is that the vision of this company is to increase individuals economic freedom..."

This quote summarizes USV's rationale for investing in Flip, emphasizing the alignment with the firm's values and the potential impact on individual autonomy.

• Harry Stebbings and Andy Weissman touch on the role of venture capital firms in supporting startups and the debate over the visibility of VCs in the industry.
• They discuss the potential benefits of VC branding for startups, as well as the preference for VCs to remain behind the scenes.

"But don't trust me on this. Their clients include the likes of Instacart, eshares and wish just to name a few."

Harry Stebbings provides an endorsement for First Republic, a company offering support systems to startups, by listing some of their notable clients to establish credibility.

"Segment really is the last integration you will ever do."

Harry promotes Segment, a company that helps businesses manage customer data, by emphasizing its comprehensive integration capabilities and its use by leading companies.